02-17-2008: March Cotton: Too Much In Storage
Everyone is expecting cotton prices to push higher, based upon historic levels, based upon demand from China that cannot produce enough of its own, and based upon the shift in acreage by farmers to grain crops in favor over cotton. But there is a problem with all of this. There still is a high percentage of ending stocks to use in the forecasts, and this is on the high end of historic levels. There's a lot of cotton still in storage. U.S. mill usage is down, perhaps in favor of other materials for clothing.
The U.S. Government has stubbornly refused to remove its subsidies to cotton farmers, which have a strong Southern states lobby in Washington. This type of subsidy could keep cotton supplies above where they should be to be in balance with demand. We are writing this story to fit a number of technical signals that mitigate a recent limit-up move in cotton prices that took everyone by surprise. That move may have been due to one trader getting caught in a short squeeze and may not be sustainable.
March Cotton:
March Cotton:
The big news on cotton is the fewer acres expected this year on account of high grain prices. Still, in February, the USDA increased its estimate of this season's ending stocks from 7.9 million to 8.2 million bales. The ending stocks to use ratio would then be 40%, an improvement from the previous year but still on the high end. Worldwide, ending stocks are estimated at 57 million bales, or 45% of annual use, down from 61 million bales the previous year. There is growing pressure from the World Trade Organization to cut cotton subsidies, but so far the U.S. Government has refused. Its loan guarantee program has supported farmers with a minimum price for their crops. Trade relations with China are getting more contentious, especially after several large recalls. U.S. growers do not have much of a market for their cotton without China. In the U.S., December milluse slowed from an annual rate of 4.79 to 4.70 million bales. For all of 2007, U.S. mill use was down 12%. In 2007-2008, the USDA expected exports to be up 21% from the previous year, but so far they are up 55%. The last weekly export sales came in at 258,600 bales, well above trade expectations. A lot cotton is already grown in China, as shown on the map below, but apparently, it is not anywhere near enough to supply their mill needs.
In the latest trading, March cotton made a limit-up move advance in the last trading session. This took a lot of people by surprise given the hefty up-front supply. Analysts think the upside is quite limited. Rumors are that a large trade was caught short wheat and forced to liquidate a large short position in March cotton. With wheat and soybean prices at record highs and the U.S. cotton industry under pressure to reduce subsidy programs, cotton producers have plenty of reasons to consider alternate crops. The cumulative sales level has reached 61.4% fo the USDA forecast for the season, compared with 72% as the 5-year average sold at this time of year. ICE cotton stocks deliverable to the exchange fell to 520,325 bales from 543,272 the previous season. Most analysts believe the limit move was too much too soon and cannot be sustained. Despite the pressures on the cotton industry and farmers to shift to other crops, there is still a sufficient oversupply that has to be worked off somehow.
105.0I R 2/15
I CTN - Mar-08 Cotton #2, 50000 lbs, c/lb. Cm.=0.06 Lim.= 2.7
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Our computer says that a non-conventional reactive approach works best for cotton. Therefore the above signal is taken as a sell signal. Please note that on this and many other of our "home grown" charts, the historical prices look different because of the way we forward-adjust our data for different contract months. The day-to-day changes correspond roughly to reality, but the longer term looks very different due to the rolling forward of contracts.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is "Pattern." It is giving a sell signal.
Results of "Pattern" for Cotton (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has triggered a sell signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $500. Initial margin on a single contract is $1,470. Use of options is not advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are starting to get increasingly-short.
The average volatility shown below suggests that the last major change in direction to up remains intact from a volatility low point.
Our option trade recommendation is to sell the Cotton July 71 Call @ 4.30 or better.
Here's an intraday chart for the previous day ( 2/15 ).
Risk Versus Opportunity Report
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CTH8 March Cotton
High Price: 72.49
Current Price: 68.82
Low Price: 61.28
Risk: -0.110
Opportunity: -0.225
(O/R) Ratio = 2.055
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | + 1 |
| News | - 1 |
| Point & Figure | - 1 |
| Cyclicals | + 1 |
| Seasonals | - 1 |
| Internal System 1 | - 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | 0 |
| Range/Volatility | + 1 |
| Level Table | - 1 |
| Other Factors | + 1 |
| Total | - 2 |
Place 10 March Cotton on a Sell Watch with stoploss @ +2.77 above the get-in point.________________________________________________________________________________________________________W.D.
